Correlation: Correlation (Corr) is a statistical technique that helps determine whether and how strongly pairs of variables are related to each other. Correlations are helpful as they indicate a predictive relationship. It measures the degrees to which two securities move together in relation to each other. It is computed into what is termed as the correlation coefficient having a value that must lie between −1 and +1. The correlation between two securities can be determined as the covariance between two securities upon their variances. The formula used to find the correlation is as follows. Where, Corr is the correlation between stocks. is the return of stock i. is the return of stock j. SD is the standard deviation. To determine: What returns of two stocks having a correlation of 1 implies about the relative movements in the stock price.

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Chapter 12, Problem 6P

Summary Introduction

Correlation:

Correlation (Corr) is a statistical technique that helps determine whether and how strongly pairs of variables are related to each other. Correlations are helpful as they indicate a predictive relationship. It measures the degrees to which two securities move together in relation to each other.

It is computed into what is termed as the correlation coefficient having a value that must lie between −1 and +1. The correlation between two securities can be determined as the covariance between two securities upon their variances. The formula used to find the correlation is as follows.

Where,

Corr is the correlation between stocks.

is the return of stock i.

is the return of stock j.

SD is the standard deviation.

To determine:

What returns of two stocks having a correlation of 1 implies about the relative movements in the stock price.

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